What is ALM?
Put simply, Asset Liability Management (ALM) as the term suggests, it is about managing and balancing the risks arising out of a bank's assets — loans and liabilities — deposits. Various kinds of risks that banks have to manage include credit risks, market risks (which include interest rates) and liquidity risk management.
What is the ALM practice in India?
Banks have to follow the guidelines prescribed by the Reserve Bank of India. The RBI rules, in turn, are based on the norms followed globally as prescribed by the Bank for International Settlements, a body of central banks from across the world. These are essentially based on various banking pillars.
What are the pillars in the process of assessing ALM, according to the RBI?
Three pillars of ALM involve the information systems, the organisation and the ALM processes. The problem of ALM is addressed by analysing the behaviour of asset and liability products in top branches accounting for significant businesses and then, making calculated assumptions about the way in which assets and liabilities would behave in other branches.
What about commercial banks?
The RBI mandates that the bank board concerned should have overall responsibility for management of risks and should decide on the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks. The asset liability committee or ALCO, including the chief executive of the bank, should make sure of adherence to the limits set by the board.
What are the functions of ALCO?
The ALCO is a decision-making unit responsible for balancesheet planning from risks — return perspective including the strategic management of interest rate and liquidity risks. The business issues that an ALCO considers, among other things, include product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities, etc. The ALCO is mandated to articulate the current interest rate view of the bank and bases its decisions for future business strategy on this view. In respect of the funding policy, for instance, its responsibility would be to decide on source and mix of liabilities or sale of assets. It will have to develop a view on future direction of interest rate movements and decide on a funding mix between fixed versus floating rate funds, wholesale versus retail deposits, money market versus capital market funding, domestic versus foreign currency funding.
